Planning For The Future: What To Do When Your Nonprofit Experiences a Net ProfitMay 18, 2023
Planning for the Future: What To Do When Your Nonprofit Experiences a Net Profit
As a nonprofit leader, you know that financial health is completely essential to your organization's success. So what do you do when you actually have a profit? Let's talk about how to track and plan for a profit so that you ensure it’s put to good use.
As I’ve shared before on my blog and Youtube channel, nonprofits not only can but should generate a a profit. (See my article or video to learn why) But whether your profit was planned or unplanned, it is an incredible opportunity that you don't want to miss. So while you're watching that monthly statement of activities or income statement, keep an eye on any profit and be intentional to plan for its use within the context of some other elements.
Understanding Nonprofit Net Assets
Below is an example that will help illustrate the planning process for any net profits. Let’s say this is the net asset section of your “Statement of Financial Position” which you may also know as your “Balance Sheet” This section gives you a financial snapshot of where your position at a particular point in time. Let's just say that you’re at the end of the calendar year, and you’ve actually ended the year with a profit. The example above shows how I recommend nonprofits should structure the net asset section of their statement, so that this information becomes more actionable and can more readily inform your decisions.
Unrestricted Net Assets
In the above example, we can see that there are $30,000 of unrestricted net assets, meaning these funds have no restrictions attached to them. Let’s pretend that this $30,000 represents the profit generated this year by your organization, and now you’re wondering, “What should we do with it?”
Donor Restricted Net Assets
The next line shows your donor restricted funds. These are funds that have come in from a donor who designated a restriction that you agreed to receive.
Internally Designated Net Assets
Now, internally designated net assets are what we’ll cover today because the profit that you just generated may already have a purpose. You may already be saving towards something or you may be realizing that you actually don't have enough cash reserves. It may already be clear that you need more of an emergency fund to help maintain operations in case of unexpected circumstances. In this case, your internally designated number ($10,000 in the example above) needs to be higher. It needs to represent three months worth of your operational budget.
Net Assets Invested in Capital
The last item in this net asset report format is your net assets that are invested in capital. This represents fixed assets minus debt. (We’ll cover that in depth in another lesson.) For now, just know that you it’s important to break that number apart inside your net asset section because those funds are not liquid.
Planning Considerations for Profits
Now that we understand where the numbers in the example above are coming from, let's just say you've reached the end of the year with a $30,000 profit. Well, your first few ideas should include the following considerations:
Does your nonprofit have enough cash in reserves?
Are your reserves big enough? To answer this question, you need to calculate a minimum amount equal to three months of your operational budget. Do you already have internally designated net assets equal to three months expenses? If not, now is the time to make that goal a reality. In this case, your accountant should ensure that those unrestricted funds are earmarked for reserves and brought down to the “internally designated” line of your net asset section.
Are you saving toward a large program or project?
The second major consideration when allocating net profit should be any large expense that you’re saving toward. Are you planning a large program launch? Are you working on a capital campaign? If so, you can internally designate these resources for a particular purpose. This internal designation differs from donor restriction because the designation can be added or removed by the board in the future. Internally designating funds in this way is a helpful strategy for making the net asset section of your financial reports clear and actionable.
Is there profit remaining?
Once you’ve evaluated and allocated for reserves, large program costs, and capital projects, and these funds have been earmarked and tucked away, are there any funds left? At this point, whatever remains in the unrestricted category now becomes that “opportunity dollar.” For instance, this might be the point at which you decide that you can overspend on salaries for the current year because the difference can be covered by a surplus from a previous year.
I hope this has been helpful. I want to remind you that if you're enjoying these nonprofit financial tips, you can find more helpful info just like this on my blog and my YouTube channel or by following me on LinkedIn. I want you to know that I'm always here to help. If you need anything, don't hesitate to reach out and connect with me!
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